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Fitch Rates San Diego County, CA's $30MM 2012 COPs 'AA+'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following San Diego County, California (the county), certificates of participation (COPs):

--$30 million (2012 Cedar and Kettner Development Project).

In addition, Fitch affirms:

--Implied San Diego County general obligation (GO) bond rating at 'AAA';

--$787.1 million in outstanding San Diego County pension obligation bonds (POBs) at 'AA+';

--$395.1 million in San Diego County and San Diego Regional Building Authority certificates of participation (COPs) and lease revenue bonds (LRBs) at 'AA+'.

The Rating Outlook is Stable.

The COPs are expected to sell via negotiation during the week of Oct. 8, 2012. Proceeds will be used to fund development of a 600-space parking structure serving the County Administration Center.

SECURITY

The 2012 COPs are secured by the county's covenant to budget and appropriate lease rental payments, subject to abatement, for the use of the George Bailey Detention Facility (the facility), the county's largest jail. Outstanding COPs and LRBs are secured by lease rental payments for the use of various county properties, also subject to abatement. The POBs have been legally validated as an obligation of the county.

KEY RATING DRIVERS

LARGE AND DIVERSE TAX BASE: As the fifth largest county in the nation, San Diego benefits from a large and diverse tax base with substantial ongoing development. Despite housing price declines of 40% from peak levels, taxable assessed value (TAV) has been relatively stable, with cumulative declines of approximately 4% over the past five years, largely due to Proposition 13's limits on TAV growth for existing properties.

SLOW BUT STEADY RECOVERY: County unemployment rates remain elevated at 9.2% as of July 2012, but employment levels have risen steadily since mid-2010, albeit at modest rates.

STRONG FINANCIAL POSITION: The county's general fund financial trend remains stable, with healthy general fund balances and reserves, reflecting strong, institutionalized management policies and practices, including disciplined pension funding and effective actions to limit retiree pension and healthcare costs.

LOW DEBT: Debt management is very conservative, with significant cash financing and early debt retirements, resulting in low debt levels with above-average amortization.

CREDIT PROFILE

San Diego County is the nation's fifth most populous county with over three million residents and 18 incorporated cities. The core industries of its diverse economy include manufacturing, the military and related defense industries, and tourism. Employment levels have risen at a slow but steady pace since mid-2010, yet unemployment persists at a stubbornly high level (9.2% in July 2012). Wealth and Income indicators for the county remain above average.

LARGE AND DIVERSE TAX BASE

The county's tax base has retained much of its value during the recent downturn despite housing price declines that have exceeded the national average. Between 2006 and 2011 housing prices fell 40%, yet TAV levels dropped only 4% from peak levels. Proposition 13's restrictions on TAV growth in prior years explains much of this discrepancy, as more than half of taxable properties have base values established prior to 2003. Proposition 13's stabilization of TAV levels has been a key financial factor for the county, as it relies on property tax for 84% of general purpose revenues.

STRONG FINANCIAL POSITION

The county has achieved consistently strong general fund results with positive operating margins in four of the past five fiscal years. Results for fiscal 2012 are expected to continue this positive trend, with a projected addition of $97.2 million to fund balance. Unrestricted fund balance (the sum of committed, assigned, and unassigned fund balance per GASB 54) at the end of fiscal 2011 was a healthy 35.7% of general fund spending.

The county's strong financial results are supported by forward-looking management policies and practices which include clear reserve targets, disciplined funding of capital needs and long-term obligations, and conservative budgeting. In addition, the county has instituted numerous expenditure controls over the past several years, reducing both near-term and future cost pressures through strategic reductions in spending on employee and retiree benefits.

LOW DEBT

The county benefits from its low debt burden as a result of a preference for cash financing of projects and early debt defeasance. Overlapping debt levels are moderately low at $3,622 per capita and 2.8% of TAV. Amortization is above average with 64% of outstanding principal repaid within ten years.

The county retains a substantial unfunded liability for retiree pension costs which is expected to increase over several years due to recent investment losses. In 2007 the county eliminated post-retirement healthcare benefits for active employees, capping its liability for other post-employment benefits.

Fitch notes as a credit positive the county's full funding of its actuarially annual required contribution for both pensions and OPEB which together with debt service consumed a low 10% of fiscal 2011 general fund spending.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Fitch Ratings
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Stephen Walsh
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Jessalynn Moro
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elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings